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Lucky Numbers

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       8-22-2001          High      Low     Volume Advance/Decline
DJIA    10276.90 +102.76 10305.13 10134.50 1.06 bln   1625/1449	
NASDAQ   1860.01 + 28.71  1860.02  1817.70 1.44 bln   1541/2128
S&P 100   594.68 +  4.41   596.48   587.49   Totals   3166/3577
S&P 500  1165.31 +  8.05  1168.56  1153.34             
RUS 2000  477.18 +  4.94   477.19   470.63 
DJ TRANS 2801.92 + 21.41  2806.01  2771.16 
VIX        25.09 -  0.90    26.72    24.78 
Put/Call Ratio      0.56

Lucky Numbers

While punters across the country were busy scrambling for winning Powerball numbers, the Nasdaq Composite (COMPX) was forming an intraday double bottom at the 1817 level Wednesday. From that oversold level the COMPX solidly advanced into the close. Meanwhile, the Dow Jones Industrial Average (INDU) once again attracted buyers below the 10,200 level, who ultimately carried the blue chip index back above that key support area. The catalysts for Wednesday's rally: An absence of negative earnings and economic news combined with a smear of positive reports.

The financial media has given extra attention recently to support levels across the broader market averages during this meltdown. None of which, in retrospect, have provided support. So what was lucky about the 1817 level Wednesday, insofar as the COMPX is concerned? My best explanation is that short-term supply finally subsided around 1817, where demand equalized the selling, in turn, resulting in a capitulation to the upside on the part of the shorts. In other words, a dead cat bounce. Although volume was a bit more active Wednesday, it still didn't reveal real buying by institutional market participants, which strengthens the case for a short covering-induced rally and weakens the case for 1817 providing future support for the COMPX.

Instead, the 1800 level could attract buyers for its whole, round nature. And if that psychological level doesn't hold, very significant technical support lies at 1755. If the COMPX falls below 1755, it's my belief that the April lows will not only be tested, but taken out. In the meantime, it's worth noting that the daily Stochastic reading for the COMPX remains oversold even after Wednesday's advance. And by that metric alone, one could surmise that the COMPX has the potential to follow-through into Thursday's session if the shorts stay panicked. If that scenario plays out, traders should be aware of the significant overhead resistance that exists between the 1890 to 1900 area.

The Dow also traced a double-bottom Wednesday, but its bottom is on a much different timeframe: Daily. The Dow fell to 10,120 on July 11 and its intraday low was 10,134 Wednesday. So it wasn't exact, but 14 points is close enough for me. Unlike the COPMX's 1817 level, I think that the 10,130 area is a bit more significant to the Dow. If that level is lost, the Dow should see 10,000 in short order, which is both a psychological and technical support level. In terms of resistance, the Dow's daunting descending trend line currently resides around the 10,400 area.

The Semiconductor Sector, not by surprise, led the COPMX to its 1.56 percent gain. The chip sector received a double dose of positive news after the bell Tuesday. First, an industry group reported that bookings rose by 5 percent during the month of July, over June's numbers. That in turn boosted chip equipment shares such as Novellus (NASDAQ:NVLS), KLA-Tencor (NASDAQ:KLAC), and Applied Materials (NASDAQ:AMAT). Other stocks within the group ended with substantial gains thanks in part to Semtech (NASDAQ:SMTC) and Triquint Semi (NASDAQ:TQNT). Semtech reported numbers that beat estimates Tuesday evening and lifted guidance for its third-quarter. Triquint, who is a chip company that caters to the wireless markets, reported Tuesday night that it saw signs of a recovery in the mobile phone market by the end of year. Shares of Semtech and Triquint ended 20 and 15 percent higher, respectively.

The Biotechnology Sector also played a large role in the COMPX's rise Wednesday. The Biotechnology Sector Index (BTK.X) rose by 4.8 percent amid favorable news on the FDA front and continued merger and acquisition activity within the group. For its part, the BTK broke above the 500 level led by gains in shares of Amgen (NASDAQ:AMGN), Biogen (NASDAQ:BGEN), Human Genome (NASDAQ:HGSI), and Millennium (NASDAQ:MLNM).

Despite a positive showing from Intuit (NASDAQ:INTU), the Software Sector under performed the broader tech sectors Wednesday. Intuit reported after the bell Tuesday, with results coming in better than expected. On top of its upside surprise in earnings, the company reaffirmed its guidance for 2002 and its shares received an upgrade from Prudential. The stock finished a whopping 22 percent higher Wednesday!

But despite that boost from Intuit, the Software Sector Index (GSO.X) only finished 2.5 percent higher. While it was a decent gain, the GSO did under perform the Semi and Biotech sectors. Within the Software group, bellwethers such as Microsoft (NASDAQ:MSFT), Check Point (NASDAQ:CHKP), and Verisign (NASDAQ:VRSN) finished lower, which may hint towards inherent weakness in the sector.

In the positive category for the day, the American Gas Association reported weekly natural gas supply figures, which rose by 86 billion cubic feet in the last week. The number was higher than expected and resulted in a sell-off in the energy market. The majority of energy-related equity issues finished lower as well, evidenced by the slides in the Oil Service Index (OSX.X) and the Natural Gas Index (XNG.X). The lower energy prices fall, the better for consumers, businesses, and the economy!

One stock that could benefit from lower energy prices is General Motors (NYSE:GM). After seeing its shares plummet during the past few sessions, GM officials reaffirmed guidance after the bell Tuesday, which stabilized its stock. Shares ended the day about 3 percent higher, but are well off their relative high around $67 traced about a month ago.

The beleaguered box makers were dealt another blow in after hours. Standard & Poor's cut their rating on Gateway's (NYSE:GTW) debt to junk status. S&P based its downgrade on the competitive condition in the box maker business and Gateway's declining revenue base. The downgrade is unfortunate for Gateway because it will raise the company's borrowing costs.

Looking forward, there are a few economic reports to look out for in the coming days. Thursday morning will see the release of Jobless Claims. New Home Sales and Durable Goods Orders are set for release Friday morning. And in the case of each of these reports, good news is good for the market at this point in the cycle.

With the broader markets, especially the Nasdaq, in relatively oversold territory, there's the potential that Wednesday's advance has some legs. But the heavy resistance overhead in each of the indexes is going to require some serious buying to clear. The catalyst to induce institutions to pull the trigger could come in the form of positive economic news in the next two days. But any further signs of deterioration in the economy would cause the broader market averages to rollover from their current levels. There's no denying that the markets remain difficult to game; just when the COMPX looked like it was going to breakdown and capitulate to the downside Wednesday, buyers emerged at the 1817 level to prop it up. My best advice is for readers to stick with their strategies and stay disciplined! And in the worst case, drop a few dollars on a lottery ticket. They tell me the odds of winning the Powerball jackpot are 1 in 80 million. I wonder what the odds are of picking the bottom in the market?

Eric Utley
Option Investor

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